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1. Introduction

In the budget tabled on June 6, 2011, the Government announced its plan to introduce a framework to allow federally regulated property and casualty (P&C) mutual insurance companies to convert to share companies. In developing this framework, the Government is consulting broadly to ensure that all affected parties have an opportunity to provide input on this important issue.

The Insurance Companies Act contemplates the demutualization of life and P&C insurance companies. The terms and conditions for demutualization are required to be set out in regulations. While demutualization regulations have been adopted for life companies, none exist for P&C companies. Given the recent interest of some P&C companies to demutualize, the Government has committed to developing a P&C demutualization framework.

2. The Mutual P&C Insurance Landscape

Mutual P&C companies engage in a number of business segments, including automobile, home and commercial insurance.

Relative to the broader P&C insurance sector, the federal P&C mutual sector is small, consisting of a few companies whose operations are predominantly regionally based. Most companies are relatively small, ranging from approximately $20 million to $200 million in equity. However, two companies rank among the top 10 largest P&C insurers in Canada, each having over $1 billion in equity.

In terms of governance structures, companies fall into two categories: those in which all policyholders are entitled to vote on decisions of the company, and those in which some policyholders are entitled to vote and others are not. Voting policies in companies with a dual policyholder structure have not been widely accessible in recent years, due in part to qualification requirements, limited distribution, or the cessation of voting policy issuance.

3. Issues for Consideration

The Government wishes to consult on the development of a demutualization framework for P&C companies. Given that a framework exists for life companies, the Government is seeking views on whether there are unique factors that call for a different approach for P&C companies.

(a) Policy Objectives

The demutualization framework developed for life companies in 1999 was supported by three broad policy objectives: providing fair and equitable treatment to policyholders, maintaining safety and soundness, and enhancing efficiency and competition. The framework sought to establish an orderly and transparent process.

The circumstances for demutualization in the P&C sector may be different than for life companies. As such, the Government is seeking views on the appropriateness of the life company policy objectives for P&C demutualization, and how they should be applied in the P&C context.

Fair and Equitable Treatment of Policyholders

Mutual companies exist for the benefit of their policyholders. The decision of who should vote on demutualization and how the value of the company should be allocated should be fair and equitable to policyholders. These issues should be objectively assessed, based on relevant factors. Insurance benefits and coverage should be preserved after demutualization.

Maintaining Safety and Soundness

Demutualization should preserve, and not impede, the safety and soundness of a company. Post-demutualization, a company should be able to maintain sufficient capital to sustain current and future operations. Ultimately, demutualization should result in an effective governance structure and allow stakeholders to adequately scrutinize the company’s operations.

Enhancing Efficiency and Competition

Companies should have the flexibility to determine the best structure for having competitive and efficient operations. Canadians should continue to have access to competitively priced products and services.

Orderly and Transparent Process

The demutualization process should result in informed decision-making and transparency for affected parties. The process should not be too complex, time-consuming or costly to undertake.

(b) Demutualization Process

The Insurance Companies Act permits mutual insurance companies to convert to share companies. A company seeking to demutualize must obtain the approval of its policyholders who are eligible to vote on demutualization and the approval of the Minister of Finance, on the recommendation of the Superintendent of Financial Institutions.

While the legislation permits insurance companies to demutualize, the details of the demutualization process are left to be established through regulations. In particular, regulations are required to establish those policyholders that are eligible to vote on demutualization. The regulations can also specify the mechanisms for ensuring that policyholders are treated fairly and equitably, including for determining the value of the company and apportioning the benefits of demutualization.

(c) Impacts of Demutualization

Demutualization will impact the institution, its policyholders and the P&C insurance sector, among others. The conversion to a company with common shares means that the company can be more easily acquired and may result in consolidation of the sector. The demutualization framework that was adopted for life insurance companies in 1999 required large demutualized life insurance companies to remain widely held for a two-year transition period to allow them to adjust to their new form of ownership.

Consideration should also be given to the impacts of demutualization in the regions and communities in which mutual companies operate. Most mutual companies are regionally based and active in their communities—whether as direct employers, through contributions to communities, or through their functions as financial intermediaries to local consumers and businesses.

4. Number of Voting Policyholders in Some Mutual Companies

Currently, federal mutual companies with a dual policyholder structure have a small number of voting policyholders relative to the number of non-voting policyholders. There has been a practice of limiting the issuance of voting policies and, subsequent to the interest in demutualization, issuances have largely ceased. Thus, the voting policyholder base may decline further.

Voting policyholders in a mutual company serve an important governance function. Independent from the demutualization issue, the Government is seeking views on how mutual P&C companies can ensure that they continue to have an effective governance structure, and whether measures need to be taken to increase the number of voting policyholders.

5. Questions for Consultation

The Department of Finance would welcome comments on the following questions:

a) Policy Objectives

The policy objectives for life companies were: a) providing fair and equitable treatment to policyholders, b) maintaining safety and soundness, c) fostering a competitive and efficient sector, and d) establishing an orderly and transparent process.

1. What should be the policy objectives for the demutualization of P&C companies?

2. Are these also appropriate in the P&C context, and if so, should they be applied to P&C companies in the same manner or differently?

b) Demutualization Process

1. What should be the process for allowing a P&C company to demutualize? In particular, what should be considered in determining who should have the right to vote on, and receive the benefits of, demutualization?

2. What should be considered in ensuring that policyholders are treated fairly and equitably, including for determining the value of the company and apportioning the benefits of demutualization?

c) Impacts of Demutualization

1. What impacts could demutualization have on the P&C sector?

2. Would these need to be addressed, and if so, how?

d) Number of Voting Policyholders in Some Mutual Companies

1. What implications does a small and declining voting policyholder base have for the effective governance of a mutual company?

2. How can companies with a dual policyholder structure ensure that they continue to have effective governance structures?

3. Should measures be taken to increase the number of voting policyholders, and if so, what should those measures consist of?